NOTE 10 – INCOME TAXES

Components of the net loss consist of the following (in thousands):

In 2017, the foreign losses were primarily comprised of $18.9 million related to the Bermudan operations of Tonix Holding Pharma Limited, which included a licensing fee of $2.0 million charged by Tonix Sub pursuant to a licensing agreement with Tonix Sub. In 2016, the foreign losses are comprised of $32.4 million related to the Bermudan operations of Tonix Holding Pharma Limited, which included a licensing fee of $2.0 million charged by Tonix Sub pursuant to a licensing agreement with Tonix Sub.

The operations and management of Tonix Holding Pharma Limited are located in Bermuda, and accordingly, are not subject to income taxes in Ireland, which is its country of incorporation. The operations of Tonix Holding Pharma Limited are not subject to income tax in Bermuda.

A reconciliation of the effect of applying the federal statutory rate to the net loss and the effective income tax rate used to calculate the Company's income tax provision is as follows:

Deferred tax assets and related valuation allowance as of December 31, 2017 and 2016 were as follows (in thousands):

The Company has incurred research and development (“R&D”) expenses, a portion of which qualifies for tax credits. The Company conducted an R&D credit study to quantify the amount of credits and has claimed an R&D credit on its 2014, 2015, and 2016 tax returns. A portion of these R&D credit carryforwards are subject to annual limitations in their use in accordance with Internal Revenue Code (“IRC”) section 383. The R&D credit carryforwards at December 31, 2017 have been reduced to zero to reflect IRC section 383 ownership changes through December 31, 2017 and the resulting inability to utilize a portion of the R&D credit prior to its expiration.

At December 31, 2017, the Company had available unused net operating loss (“NOL”) carryforwards of approximately $0.3 million that expire between 2030 and 2036 for federal tax purposes. The Company also has approximately $0.0 million of NOL carryforwards for New York State and $0.1 million for New York City purposes expiring between 2035 and 2036. Additionally, the Company has $4.2 million of Ireland NOL carryforwards that do not expire and $0.1 million of Quebec NOL which expires between 2035 and 2037. A portion of the federal, New York State, and New York City NOL carryforwards are subject to annual limitations in their use in accordance with IRC section 382. The NOL carryforwards at December 31, 2017 have been reduced to reflect IRC section 382 ownership changes through December 31, 2017 and the resultant inability due to annual limitations, to utilize a portion of the NOL prior to its expiration.

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2017. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future growth. As such, the Company has determined that it is not more likely than not that the deferred tax assets will be realized and accordingly, has provided a full valuation allowance against its gross deferred tax assets. The (decrease)/increase in the valuation allowance for the years ended December 31, 2017 and 2016 were ($13.9) million, and $1.8 million respectively. 

The Company recognizes interest accrued related to unrecognized tax benefits and penalties as income tax expense. However, as of December 31, 2016 there are no unrecognized tax benefits recorded. The Company is subject to taxation in the United States and various states and foreign jurisdictions. As of December 31, 2017, the Company's tax returns remain open and subject to examination by the tax authorities for the tax years 2014 and after.

On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act includes significant changes to the U.S. corporate income tax system including: a federal corporate rate reduction from 35% to 21%; limitations on the deductibility of interest expense; creation of the base erosion anti-abuse tax (“BEAT”), a new minimum tax; and the transition of U.S. international taxation from a worldwide tax system to a modified territorial tax system. The change to a modified territorial tax system resulted in a one-time U.S. tax liability on those earnings which have not previously been repatriated to the U.S. (the “Transition Tax”), with future distributions not subject to U.S. federal income tax when repatriated. A majority of the provisions in the Tax Act are effective January 1, 2018.

The Company has reflected the impact of the changes to the U.S. corporate tax rates.  The adjustment of the tax rates reduced the gross deferred tax asset by $4.8 million with a corresponding $4.8 million adjustment to the valuation allowance.  This has no impact to the net tax expense.  In connection with the Company’s analysis of the impact of the Transition Tax, the Company determined that the foreign subsidiaries are in a net accumulated deficit so the Company has recorded no tax expense for the period ending December 31, 2017. All impacts of the Tax Act have been measured in the Company's income tax provision.